We're Running Out of Apartments! (Well, Maybe Not)

The typical picture of the housing crisis in America is miles of empty tract homes and half-built lots, years away from ever being filled. In New York the story is a little different, and The Times weekend Real Estate section paints a both bleaker and better picture in a rather alarmist article about the coming apartment shortage in the city. It will mean higher prices, yes, but also nowhere to live!

Brokers, developers and market watchers say that barring any significant economic hiccups, real estate values in Manhattan will continue to grow at a measured rate through 2011. But starting in 2012, after most or all the new projects that were stalled or delayed have finally sold out, the supply of new apartments will take a decided dip, and prices for all apartments could start to rise significantly again. “Once we work through the existing inventory and there’s nothing new coming on line,” said Kelly Mack, the president of the Corcoran Sunshine Marketing Group, “there’s going to be a major shift in the market. Prices may start going up significantly in 2012, in anticipation of the shift in inventory.”

The sky is falling! Or is it rising?

Probably neither. While the contention that there will be very few new apartment buildings built in the next two years is true, the proposition that demand and prices will skyrocket seems likely, with the possible exception of the once-again hot, high-end market. For one thing, there is the looming foreclosure mess, which, if not concentrated in New York as it is elsewhere, is still bound to ramp back up as the banks resume reposessions following their moratoriums last year.

There are two big issues here in New York, though. The first is stalled construction. While we may not have thousands (millions) of move-in ready homes like they do in the Southwest and other parts of the country, there are still more than 700 stalled construction sites in the city, a number that continues to grow. Those are in various states of completion, and many are still years away from being finished, but even assuming a modest 15 units per project, that is more than 100,000 units that could be realized in a fairly short period of time should demand arise.

The far larger supply comes from those apartments already built, though. There are thousands of units of shadow inventory still waiting for the market to improve enough to be up for sale. While these may not be the sort of brand-new, prime property The Times wrings its hands over in the article, it is a massive supply of housing that must be dealt with.

Here is how Jonathan Miller put it to The Observer in an email: “This is the repetitive sales mantra now–all the parties are championing the point that we are running out of inventory tomorrow. Prices and sales are being held in check by limited financing options for buyers. Permits were wildly inflated during the boom so the sharp fall doesn’t mean much other than the market reacting to the fact that there is too much product and demand isn’t changing tomorrow.”